Artemis spoke with Sean Bourgeois, Founder and CEO of insurance technology (InsurTech) start-up Tremor Technologies, Inc., to discuss its mission to create an open, technology-driven, programmatic marketplace for reinsurance risk placement.
Tremor is particularly interesting to us given its open approach and the fact it is agnostic as to the sources of capital and capacity, or structures involved in the transfer of risk.
This means it is open to insurance-linked securities (ILS) funds and investors and importantly it is not trying to push a new structure or product on the market, rather seeking to fit into existing company and investor workflows to help make their risk market placement and transfer processes significantly more efficient.
Bourgeois explained the idea behind his InsurTech start-up and how it is looking to help the reinsurance and risk transfer industry address its inefficiencies with the help of technology, in an interview with Artemis.
What gave you the idea to start Tremor and what market problems are you trying to solve?
After spending the first half of my career as a reinsurance underwriter, I left the industry about 15 years ago and moved into tech. I spent the second half of my career at very large platform companies in the advertising technology space, building complex systems to intermediate advertising programmatically – utilizing auction technology and optimization techniques to clear pricing and to manage placement extremely efficiently at massive scale.
As I watched advertising move from a predominantly subscription market to a predominantly programmatically traded market in a few short years – and the resulting ecosystem of marketplaces, exchanges, bidding management platforms, data management platforms and analytics companies rapidly form to support this new approach to trading – it became increasingly clear to me that many of these technologies and techniques would apply very well to the risk industry to deliver step function improvement to a very large market.
The wholesale risk and reinsurance industry today is not efficient, transparent or particularly fair. It is not as competitive as it should be nor as dynamic as it could be. Our “smart market” delivers all of the following in ways a subscription market cannot:
Efficiency – With Tremor, gains from trade are maximized subject to the constraints that market participants face. Risk is transferred to those best able to bear it. The total value created from trade is maximized. To achieve high levels of efficiency requires that market participants can express their preferences and constraints effectively and is motivated to do so. Our matching engine takes the expressed preferences and constraints and identifies the best allocation of risk.
Transparency – The market we are building has a high degree of transparency, whereby market rules are available to all market participants. Market rules translate orders into outcomes in an unambiguous way. To build trust, our market includes means of verifying that the market rules were followed. Market data in aggregate form is available immediately after an auction event.
Simplicity – The reinsurance market is complex. We are striving to keep the design as simple as possible, as complicating features should only be added if they are necessary and consistent with market principles.
Fairness – Equal and non-discriminatory treatment is essential for optimal market function. All parties have access to the market on the same terms and outcomes do not favor either side of the market. Fairness is encouraged by Tremor as an independent market operator.
All of this said, I did not do any of this alone and we are not a small team. Building a robust, sustainable programmatic market in a new industry is a massive undertaking requiring deep, highly specialized expertise. We have been working on building Tremor under the radar for over two years with close industry participation and involvement.
Along the way, we have built an exceptionally qualified and deep market design, product and engineering team. We have invested significantly in time, cost and people to ensure that the marketplace we are building draws on the best of academic research and applied techniques across a range of industries. Our market design team includes top researchers led by Tremor’s Chief Economist, Peter Cramton and includes 2012 Nobel Prize winner Prof. Al Roth of Stanford, Prof. Dirk Bergemann, Chair of the Yale Economics Department, 2018 Rolf Nevanlinna Prize winner (one of the most prestigious international awards in mathematics) Prof. Costis Daskalakis of MIT, Prof. Jakub Kastl of Princeton and Prof. Sven Seuken of the University of Zurich, among others.
It is our firm belief that to be successful to launch a smart market in an industry as complex as the reinsurance industry, this caliber of talent is required, this amount of time under the radar is required – there are no shortcuts to success.
You’re taking a different approach to the trading of risk to other start-ups, can you explain the basic premise of Tremor?
Tremor is a market platform that harnesses the latest smart market technology to improve the pricing and allocation of risk in reinsurance markets.
The market platform supplants the final negotiation between insurers, brokers, and reinsurers: insurers design their risk programs as they do today and bring them to the platform, where reinsurers bid on the programs offered. Tremor matches supply and demand and specifies trades to be executed through current channels.
For insurers and reinsurers, Tremor creates value by optimizing risk distribution and ensuring that trade happens at fair market prices. For brokers, the exchange increases their effectiveness monetizing insurers’ programs and creates new ways to optimize them.
At Tremor, we harness technology to create value for both sides of the market. Both insurers and reinsurers can express preferences in a simple, yet powerful way. The market engine then creates as much value as possible and splits the gains fairly between sellers and buyers with competitive clearing prices.
With our approach, we are focused on issuing risk fundamentally much more efficiently, competitively and dynamically – we are not trying to create a continuous secondary market to trade risk as other insurtech start-ups are working on. While we find the notion of bringing risk directly to retail investors who can then trade it amongst themselves interesting, we believe strongly that massive inefficiencies exist today that can be addressed immediately with deep tech without creating entirely new models or asking market participants to work in completely new ways.
This is bearing itself out in the market, and the market is voting for our approach with demand. We now have a very healthy pipeline of protection buyers, with auctions scheduled for the fourth quarter of this year with significant limit committed with sizable revenues for Tremor. Our tech and our approach is clearly in demand in the market, solving important problems, dramatically improving efficiency, dynamism and competition.
How do you see the market developing as technology platforms, like Tremor, that enable efficient interchange and transfer of risk evolve?
We see Tremor as a new nexus for risk transfer. We hope Tremor will be the first and the largest of a new wave of marketplaces and exchanges at the center of this new world, of course. I believe that tech initiatives and startups will gravitate towards this new world that we are building and continue to improve it.
I see a risk trading world where brokers build trading desks as extensions of their businesses that exist today. These desks will interconnect into multiple buy-side technology platforms, that in turn connect with multiple marketplaces and exchanges – all powered by data providers and analytical tools, many provided by entirely new companies.
This sort of ecosystem evolution will be a very good thing for the risk industry. We believe that this ecosystem and our marketplace at the center will attract more and more buyers and sellers that see the value and want to trade this way, leading to natural standardization which will further benefit the market. We see this approach as much better for everyone as opposed to trying to force standardization up front, require market participants to invest significantly and to learn complex new systems or worst of all – force market participants to use a new platform or face penalties if they do not.
Do you see Tremor benefitting the ILS market and its investors? If so how?
ILS market participants in particular have been early supporters and early adopters of Tremor’s technology. ILS market participants are familiar with programmatic technologies and have tech stacks ready to lever them and as such, have embraced our approach to making more risk available to more market participants.
Our technology follows the form of the market – we are able to facilitate the pricing and placement of traditional re/insurance transactions, derivative form transactions (ILWs) as well as cat bonds – without requiring participants to re-key in data or learn a completely new, complicated platform.
We have been pleasantly surprised to have been contacted directly by ILS investors, some of whom are considering an ILS allocation looking for a trading platform to enter the market. We see massive opportunity to facilitate the current trend of capital getting closer to risk.
Can Tremor help markets with their origination of risk and risk discovery?
Tremor opens a number of opportunities in risk origination. Our platform will enable markets to keep the risk they want and offload whatever risk is most efficiently held in someone else’s portfolio. This can happen through the insurance chain, in small or large transactions from retail to wholesale to MGA to fac to treaty reinsurance to retro and back again. Additionally, as re/insurers are given more flexibility in offering and offloading their risk, more will be incentivized to bring their risk to market.
Furthermore, there are some exciting insurtechs making primary origination of risk easier and easier – we see a world where we directly integrate with these firms enabling vastly easier and more efficient syndication of entirely new classes of risk.
Is Tremor looking at ways to standardise pieces of the risk transfer placement?
I do think that standardization will come to a world where risk is transacted programmatically, but I think that this will evolve as programmatic transactions begin to happen, not before. The market will naturally gravitate towards standardization and the development of this standardization will happen by participants themselves, not forced on participants by the market itself.
Our first approach is to abstract the risk issuance process to its simplest form. With Tremor, the existing business process and workflow remains the same – insurers will build submissions with their brokers and reinsurers will underwrite, price and construct portfolios with the same information and process as they do today. Tremor delivers massive efficiency with a competitive price determination and limit allocation process based on sophisticated mathematical programming underpinning batch auctions – but for participants, our system is extremely easy to learn and use – bids can be entered in a matter of minutes in a highly secure environment.
How should the broker community think about Tremor?
Intermediaries will be an important partner for Tremor. Our approach lets intermediaries focus on their highest-value activities such as program design, bidding strategy and analytics while we focus on pricing, allocation and placement with technology. Brokers will be welcomed as programmatic traders. We have built access specifically for them to manage client accounts.
I’ve seen the same evolution happen in adtech (advertising technology). Initially brokers (ad agencies) were hesitant to embrace programmatic technology as they were concerned about disintermediation. Today all large agencies have programmatic trading desks and their businesses have grown overall. The skills and focus will evolve, but there is a tremendous opportunity for intermediaries whom embrace programmatic trading and move up the learning curve quickly.
Most of our buyers have requested that their broker remain involved, and see a role for them to play in Tremor transactions, and we welcome brokers to participate.
There are clear opportunities to add additional value by making insurers and reinsurers lives simpler. What are Tremor’s plans in this area?
The reason we focus on fitting our market into the current workflow, changing as little as possible about the current process is to ensure success of what we see as the absolute biggest possible value-add: more efficient allocation and pricing.
We definitely agree on a lot of other clear opportunities to add additional value – currently the market spends a lot of time duplicating data entry and managing a lot of paper. But as you know, every change in process creates additional hurdles for some market participants; we want to make sure that we get the biggest gain up front and work on the clear smaller marginal improvements as we succeed in making the core market more efficient, giving reinsurers the right risks for their portfolios and insurers getting a competitive allocation process.
We also believe there are tremendous opportunities to semi-automate collateralization of limit, manage premiums and claims notification, and to dynamically build programs and towers based on market supply – in addition to building deep integrations into the tech stacks of both sides of the market to supercharge workflows.
For example, we have already tested a direct integration with a protection seller whereby they “listened” programmatically for a certain type of auction, auto-extracted a raw exposure file related to the auction, processed and modeled the exposure, pushed the result into their portfolio construction engine and pricer and returned to us a supply curve – all programmatically – a human was only involved in the final approval step.
While we are not focused on fully automating the underwriting process, and while it is most important that we build tools that allow both sides of the market to best express their true preferences for each and every risk, this is an example of where we see further efficiencies to be gained, and where they can only be gained in a programmatic environment.
Ultimately what value do you think Tremor can bring to the reinsurance market value-chain?
The greatest value comes in making the allocation and pricing of risk more efficient. The more efficient risk is allocated, the better able the industry is able to withstand losses and the more that pricing aligns with actual risk, the easier it is for insurers to access reinsurance where they may not have before.
An important property of Tremor’s platform is that it maximizes the gains from trade. Reinsurance exists to transfer risk from insurers to reinsurers. Since the reinsurer’s portfolio is diversified, the cost for it to cover a risk is lower than the cost for the insurer to bear the same risk – the difference in costs is the gain from trade. Market clearing prices always maximize the gains from trade because they trade exactly when the insurer’s cost is greater than the reinsurer’s cost.
Efficient allocation of risk is particularly important as the market moves beyond a payback model with hard and soft years wherein reinsurers who paid out in one year might see a large premium increase the next year to cover some losses. In such a market, it is okay if a reinsurer’s portfolio is overweight in an individual risk, since large losses will get reimbursed. As that premium increase becomes less reliable, it is critical that reinsurers have the power to construct properly diversified portfolios and reinsurers get the right risks for their portfolio. Maximizing gains from trade across all parties ensures that risk is being spread as efficiently as possible across the market.
Maximizing the gains from trade is not the same as naively finding the maximal payout for cedents or for reinsurers. Optimizing for either the cedent or for the reinsurer would forego gainful trade while forcing a low (respectively high) premium to favor the cedent (respectively reinsurer). Tremor’s platform is not biased in this way; it treats cedents and reinsurers equally, maximizing the total benefits of trade.
If you had to sum up the Tremor value-proposition what would it be?
Our smart market brings efficiency, transparency, fairness and simplicity to a very expensive, opaque and slow moving market that is suboptimally priced. Step function improvements across efficiency, transparency, fairness and simplicity can only be achieved by utilizing programmatic technologies and batch auctions underpinned with sophisticated mathematical optimization – the core IP of Tremor that we have been building for more than two years with a world class team.
Over time, we will offer the industry a completely new approach to issuing risk – a dynamic market far more competitive than today at vastly lower cost which will benefit all participants.